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Cost-pressure hits margins; new MD&CEO selected

* Birla Corporation’s (BCORP’s) consolidated EBITDA declined 64-65% YoY and QoQ to Rs940mn, coming 47%/36% below Consensus/our estimates owing to higher-thanexpected cost. Blended EBITDA/ton fell by 68% YoY/61% QoQ to Rs258 (Emkay estimate: Rs400). The Mukutban plant (commissioned at end Apr-22) is expected to support volume growth and help maintain BCORP’s volume market-share in coming years. Arvind Pathak is stepping down as MD & CEO for personal reasons. For Dec22, the Board has appointed Sandip Ghose as additional director and whole-time director (WTD); thereafter, effective Jan-23, Mr Ghose will take over as MD&CEO for a period of three years. Factoring-in the Q2 miss and higher start-up cost for the Mukutban plant, we reduce our FY23E EBITDA by 19% and by 2% for FY24-25E. We maintain BUY on the stock, with revised Sep-23E TP to Rs1,185 (Rs1,200 earlier). Our DCF-based TP implies one-year forward EV/EBITDA of 8x.

* Results Summary: Cement volumes rose 11% YoY to 3.6mt, in line with our estimates. Excluding Mukutban, volumes grew 8% YoY. Capacity utilization declined 1,000bps YoY to 74%; however, on like-to-like basis, it increased to 89%. Reported cement realization increased 6% YoY/declined ~4% QoQ to Rs5,151. Blended cement sales volumes increased 10% YoY to 90% of total volumes; while premium-product volumes increased 6% YoY to 51% of trade sales in Q2FY23. Trade volumes declined 200bps YoY to 78%. As construction activities start to gain momentum after Diwali, BCORP is looking to raise prices in Nov-22. Total cost/ton increased by 20% YoY/6% QoQ to Rs5,235 (Emkay Est: Rs4,991), mainly led by higher than expected other expenses owing to start-up cost of the Mukutban plant. EBITDA loss in the Mukutban plant stood at Rs580mn in Q2FY23 vs Rs386mn in Q1FY23. The Persoda mines near the Mukutban plant is expected to become operational from next year. Also, BCORP secured the coal mine at Marki Barka (Madhya Pradesh) in Oct-22 with geological reserves of 70mt of coal and peak rated production capacity of 1mtpa. Excluding Mukutban plant, cement EBITDA/ton (including other income) declined 46% YoY and QoQ to Rs409. BCORP reported a loss of Rs565mn. What we liked: Better than expected realization and favorable commentary on pricing and demand; cost mitigation efforts. What we did not like: Increase in leverage

* H1FY23 Performance: Cement volumes rose 14% YoY to 7.6mt, whereas realization grew 7% YoY to Rs5,553. This led to a 22% increase in revenue to Rs42bn. Management guided to ~1mt of cement production in FY23 at the Mukutban plant. Total costs increased by 36% YoY to Rs38.5bn. Total cost/ton increased 19% YoY to Rs5,086. Alternate Fuel and Resources (AFR) costs increased 300bps YoY to 9%, and Management cost is expected to rise to 12% by FY23-end. EBITDA declined 42% YoY to Rs3.5bn and blended EBITDA/ton declined 49% YoY to Rs467. BCORP generated negative FCF (consolidated) of Rs7.7bn post working-capital blockage of Rs5.8bn and capex spend of Rs3.2bn. Its net debt increased by Rs4.7bn QoQ to Rs41.7bn as of Sep-22.

* Management rejig: Arvind Pathak is stepping down as MD & CEO due to personal reasons. Consequently, for Dec-22, the Board has appointed Sandip Ghose as additional director and whole-time director. Thereafter, w.e.f. Jan-23, Mr Ghose will be elevated as MD & CEO for a period of three years. Mr. Ghose has more than 35 years of management experience, spread across several industries such as FMCG, media and construction materials; previously over CY2015-20, he has been Chief Operating Officer at BCORP

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